Yen's Whiplash Day Only Begins With A Rate Hike

By Mark Cranfield, Bloomberg markets live reporter and strategist

USD/JPY may be priced for the Bank of Japan to exit negative rates - something which thanks to the non-stop media leaks we know for a fact will happen - but a knee-jerk selloff is still likely when the first headline drops as traders react to the news. And that will only be the start of what could be a series of back-and-forth swings for the yen until Governor Ueda ends his press conference a few hours after the BOJ statement lands.

While tightening policy is ostensibly a hawkish move, investors won’t be surprised if there are plenty of dovish caveats within the BOJ statement, with at least five things they will be focusing on for a sense of direction:

• *BOJ MAINTAINS POLICY RATE AT -0.1%

This is the big one. Will the BOJ finally end negative rates? Although the preamble to next week suggests the decision is too close to call, a move to zero interest rates would still shock the yen into a move higher.

• *BOJ MAINTAINS 10-YEAR JGB YIELD TARGET AT ABOUT 0%

In many ways this target is redundant as 10-year yields have been above zero for more than three years. That said, the symbolism of dropping the language would be negative for bonds.

• *BOJ KEEPS UPPER BOUND REFERENCE ON LONG-TERM YIELDS AT 1%

In October the BOJ fumbled the message by introducing flexible yield curve control and JGBs skidded lower. Clear communication on ending YCC will be important to avoid a disorderly reaction in debt markets.

• *BOJ VOTES 9-0 ON RATE DECISION

Whatever the BOJ decides, investors will want to know how split decision makers remain as a gauge for the pace of interest rate hikes to come.

• *BOJ WILL ADD TO EASING WITHOUT HESITATION IF NEEDED

Arguably the most symbolic statement of all, dropping it from the text would be a bearish medium-term signal for JGBs.

* * *

And then the fun will really begin when Ueda starts taking questions at the press conference. It’s likely that Ueda will provide dovish forward guidance, but communication in the past hasn’t always run as smoothly as the central bank would like, opening up the risk of more USD/JPY volatility.

It sets up Tuesday for a head-spinning session...  and there is still the Federal Reserve to come!